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IntroductionThis document is designed to further
your understanding of experience
rating and how it affects your workers
compensation costs.
NCCI’s Experience Rating Plan Manual
for Workers Compensation and
Employers Liability Insurance (Plan) is
an integral part of determining the
cost of workers compensation. It is
a method for tailoring the cost of
insurance to the characteristics of an
employer. It gives an employer the
incentive to manage its own costs
through measurable and meaningful
cost-saving programs.
The Plan predicts whether a qualify-
ing employer is likely to develop loss
experience that is better or worse
than that of the average employer in a
particular classification. It modifies
manual premium by a factor that is
designed to more accurately price
qualified employers. The Plan uses the
employer’s past experience to project
future losses and provides added
incentives for loss reduction.
While the underlying concepts are
complex, this document will help to
clarify the application of these
concepts.
What Does Experience RatingDo?Insurance spreads, or shares, the cost
of a loss with members of a group that
are likely to experience similar losses.
While the cost and probability of
injuries for the whole group can be
predicted with a fair degree of accura-
cy, it is impossible to determine which
member of the group will actually be
responsible for these costs.
This is why insurance exists. If pre-
dictability were perfect, the members
of the group that do not expect to
experience a loss would have no
incentive to purchase insurance, while
the premium charge for the members
that will experience the loss would
need to include the value of the loss.
Historically, we know that serious
individual injuries generally are rare
and that the cost could vary from very
minor amounts to millions of dollars.
Founded in 1923, the mission of the NationalCouncil on Compensation Insurance (NCCI) is to foster a healthy workers compensationsytem. In support of this mission, NCCI gathersdata, analyzes industry trends, and providesobjective insurance rate and loss cost recom-mendations. These activities—combined with a comprehensive set of tools and services —make NCCI the source you trust for workerscompensation information. To learn more about NCCI, please visit ncci.com.
In This Update
Introduction
What Does Experience Rating Do?
Why Have Experience Rating?
Characteristics of Experience Rating
How the Plan Operates
Qualification for Experience Rating
Types of Experience Rating
Status of Experience Rating
Experience Rating Modification Factor
Application of Experience Rating
Data Used on the Experience RatingWorksheet
Ownership Changes and Combinationof Entities
Summary of the Plan
Additional Resources to Reference
ABCs of Experience Rating
The simplest rating method for
workers compensation and
employers liability insurance is
“manual rating.” Under manual
rating, all employers are grouped
according to their business
operation or classification. The
estimated losses of the group are
added together, and an average
cost is obtained. The rates
determined for manual rating
are averages reflecting the normal
conditions found in each classifica-
tion. An employer is assigned to a
classification to ensure that the
rates reflect the costs of all
employers with similar characteris-
tics. Although each classification
contains “similar” employers, each
individual employer in a class
is different to some extent.
Experience rating is designed to
reflect these individual differences
in loss potential.
If the rating system went no further
than manual rating, insurance
providers could seek employers
with lower-than-expected costs
and possibly avoid employers with
higher-than-expected costs. To
avoid this scenario, the rating
system must be further refined.
Experience rating is one such
refinement.
In workers compensation
experience rating, the actual
payroll and loss data of the
individual employer is analyzed
over a period of time. Usually, the
latest available three years of data
is compared to similarly grouped
employers to calculate the
experience modification.
In general, an employer with
better-than-average loss experi-
ence receives a credit, while an
employer with worse-than-average
experience carries a debit rating.
Experience rating takes the
average loss experience and
modifies it based on the individual
employer’s own loss experience.
The two primary benefits of
experience rating are that it:
• Tailors the cost prediction and net
premium cost to the individual
employer more closely than does
manual rating alone
• Provides added incentives for
loss reduction that are absent
from manual rating alone
Why Have Experience Rating?If workers compensation rates are
designed to predict future losses,
why use experience rating? How
does experience rating benefit
employers?
Experience rating represents
a refinement in the premium
determination process. It does so
by comparing the industry average
experience with an individual
employer’s own experience. It
benefits employers by adjusting
the premium cost, which is the
best indicator of an individual
employer’s own potential for
incurring claims. By using these
sound insurance principles and an
employer’s own payroll and loss
data, the insurance premium will
be appropriate for the coverage
being provided.
Experience rating is not the only
pricing tool available to carriers to
determine the cost of workers
compensation coverage.
Implicit in most employer-specific
programs of experience rating is
the prospect of both debits and
credits. Since experience rating
gives individual employers some
influence over the premium they
pay, it provides an incentive for
employers to develop loss preven-
tion as well as incentives to have
the injured employees return
to work as soon as reasonably
possible. In this way, experience
rating benefits employers by
promoting occupational health and
safety.
Characteristics of ExperienceRatingWe have already mentioned the
need to modify the premium based
on manual rates, but what are the
characteristics that the Plan
recognizes?
Page 2
Page 3
Frequency vs. Severity
A significant feature of experience
rating is that it recognizes that the
cost of a specific accident is often
left to chance and is statistically
less predictable than the fact that
the accident occurred.
For example, the survivor benefits
for a young worker in his 20s leav-
ing a widow and three children
would likely be considerably
greater than the survivor benefits
for a worker in his 50s leaving no
dependents. The important fact is
that the accident did occur, so the
Plan gives greater weight to accident
frequency than to accident severity.
This reliance on accident frequency
also measures employer differ-
ences. For example, compare two
similarly sized employers from the
same classification:
• Employer A—1 loss totaling
$50,000
• Employer B—10 losses totaling
$50,000
Which employer would you expect
to incur the higher workers com-
pensation costs in the future?
Statistically, Employer A—with the
one large claim—is more stable,
particularly when you consider that
any one of the 10 small accidents
of Employer B could incur higher
costs than the $50,000 amount,
given the proper combination of
circumstances. In other words, for
two similar employers, the one
with the higher frequency of claims
will generally have higher future
workers compensation costs.
The fact that an employer may
have a small number of very costly
injuries should not be ignored. The
final measure must be a blend of
both the occurrence and the cost of
each injury.
The Plan recognizes and measures
both accident frequency and sever-
ity. Although the severity of losses
is recognized in experience rating,
very large losses are less likely to
occur and are seen as more fortu-
itous than smaller claims. In fact,
very large losses are so infrequent
that including the entire portion of
the claim beyond a certain level in
the experience period reduces the
predictive ability of the Plan. One
very large claim does not imply a
pattern of claim frequency. So,
each individual claim is capped by a
state accident limitation. The state
accident limitation amount differs
by state.
For example, let’s use a state
accident limitation amount of
$250,000. Exhibit A shows that an
individual loss of $500,000 would
be capped at $250,000 for
experience rating purposes. These
limited losses used in the Plan are
ratable losses. The amount of loss
above the state accident limitation
is excluded from the calculation of
the employer’s experience rating
modification and is a nonratable
loss.
Split Point
A split rating approach is used to
reflect both the frequency and
severity of losses. The split point
of individual ratable losses is
approved as part of each state’s
rate or loss cost filing. Losses are
split as follows:
• The amount of any ratable indi-
vidual loss up to the split point
($16,500) is known as primary
loss, which reflects frequency
• The amount in excess of the split
point is known as excess loss,
which reflects severity
• For individual claims below the
split point, the entire amount is
primary loss and the excess loss
is $0
See how this concept is applied
below in Exhibit A.
Exhibit A—Split Rating
$500,000 $250,000 $16,500 $233,500
$100,000 $250,000 $16,500 $ 83,500
$ 5,000 $250,000 $ 5,000 $ 0
Loss Amount
State AccidentLimitation
Primary Loss(Frequency)
Excess Loss(Severity)
Under this split method, primary
losses are given a greater weight in
the formula than excess losses.
Because of this, primary losses
have a greater impact on the
experience rating modification.
Although excess losses have less
weight, they’re still relevant since
total excess claim dollars can be
high. The Plan includes an incentive
for employers to reduce the fre-
quency of claims, as well as an
incentive to encourage injured
employees to return to work as
soon as reasonably possible. This
type of involvement by the employ-
er can reduce the severity of claims
once they have occurred.
Weighing of Losses
The weights assigned to primary or
excess losses are calibrated to
ensure that the modification best
reflects the loss history of the indi-
vidual employer relative to its clas-
sification.
These weights vary by size of
employer. The larger an employer,
the more its experience rating cal-
culation is influenced by its own
experience. By contrast, a small
employer may be covered for years
without a claim and then incur an
injury where the cost exceeds the
total premium paid many times
over. An equitable Plan must rec-
ognize this fact and temper the
debit due to such a loss, as well as
the credit for having no losses.
For example, an employer with 10
small losses of $5,000 each has a
much larger primary loss total than
an employer with a single loss of
$50,000, even though each would
have a loss total of $50,000. An
employer with a single claim of
$50,000 has $16,500 in primary
loss, and the rest is excess. Because
of the relative weightings, the 10-
injury employer receives a much
higher modification than the 1-
injury employer, even though its
total losses are the same.
Medical-Only Claims
Medical-only claims do not have as
much of an impact on the experi-
ence modification because most
states have approved Experience
Rating Adjustment (ERA), which
limits the amount of such claims in
the experience modification calcu-
lation. This ERA change to the for-
mula decreases the incentive for
employers to pay medical-only
claims without reporting them to
the carrier.
Only 30% of the actual primary and
excess portions of an individual
medical-only claim are included in
the calculation of the modification
factor. As a result, medical-only
claims are reduced by 70%.
This reflects the impact of medical-
only claims more appropriately.
For example, consider a single
medical-only claim of $20,000.
Exhibit B shows that the primary
portion of the loss is $16,500, and
the excess portion is $3,500. After
the adjustment, the primary por-
tion of the loss included in the
experience modification calcula-
tion is $4,950 (30% x $16,500), and
the excess portion of this claim is
$1,050 (30% x $3,500).
How the Plan OperatesExperience rating is a mandatory
plan which applies to all employers
that meet a state’s premium
eligibility criteria for the Plan.
Experience rating calculations are
computed by NCCI. As of this pub-
lication, 39 jurisdictions have
approved and authorized the use of
the Plan. The independent rating
organizations in Minnesota, New
York, and Wisconsin permit the
combination with states that have
approved the Plan for interstate
experience rating. These three
states participate in the Plan only if
the employer has exposure in two
or more participating states within
the experience period.
Page 4
Exhibit B—Medical Only Claim
$20,000 $16,500 $4,950 $3,500 $1,050
ClaimValue
PrimaryLoss
RatablePrimary Loss
ExcessLoss
RatableExcess Loss
The Plan applies in Indiana,
Massachusetts, and North Carolina.
However, the independent rating
organizations in these three states
are responsible for producing their
own intrastate ratings.
The Plan does not apply in California,
Delaware, Michigan, New Jersey,
and Pennsylvania. Nor does it apply
in the four monopolistic states
(North Dakota, Ohio, Washington,
and Wyoming) that administer their
own plans and rates.
An employer qualifies for experi-
ence rating if the subject premium
meets a premium eligibility point.
(Eligibility criteria differ by state.
Refer to the Plan for further
details.) Because experience rating
is based on past payroll and loss
experience, each employer is evalu-
ated based on its own experience
period.
An employer’s rating effective date
determines the experience period.
The experience period is generally
based on three years of payroll and
loss data but could range from con-
taining less than 12 months of data
up to the inclusion of 45 months of
data. The amount of policy data
used on the experience rating may
differ due to short-term policies,
policies with different effective
dates, or a new employer that qual-
ifies to be experience rated with
policy data from its first policy.
What is the rating effective date?
• It is the effective date of the expe-
rience rating modification and the
earliest date the mod factor can
be applied to the policy
• It is usually in effect for one year,
but it could be as short as 3
months or as long as 15 months
• It determines what unit data will
fit on the worksheet
• It determines when the work-
sheet will be produced
Data from each of an employer’s
policies is included in the experi-
ence period if the policy effective
date is no less than 21 months
before the rating effective date and
no more than 57 months before the
rating effective date. Since the
modification is calculated during
the term of the current policy—
generally 60 to 90 days before the
rating effective date—the current
policy is not used in the calculation
of the experience rating modifica-
tion. Also, the insurance provider is
not required to report data about
the policy until 18 months after the
policy inception date. This allows
insurance providers time to value
claims that may have occurred and
to prepare and submit the required
reports to NCCI. For a rating effec-
tive date of January 1, 2018, any
policy with an effective date
between 4/1/13 (1/1/18 less 57
months) and 4/1/16 (1/1/18 less
21 months) is included in the expe-
rience period.
Exhibit C illustrates the policies
that are included in an employer’s
experience period for each January
1 rating effective date.
An employer with a policy that
renews on January 1, 2018, will
generally have an experience rating
that uses the loss experience that
occurred during policies that were
effective 1/1/14–1/1/15,
1/1/15–1/1/16, and
1/1/16–1/1/17.
Page 5
1/1/2016
1/1/2017
1/1/2018
1/1/2019
4/1/2
011
4/1/2
012
4/1/2
013
4/1/2
014
4/1/2
015
4/1/2
016
4/1/2
017
4/1/2011–4/1/2014Policy Effective Dates
4/1/2012–4/1/2015Policy Effective Dates
4/1/2013–4/1/2016Policy Effective Dates
4/1/2014–4/1/2017Policy Effective Dates
Rating Effective Dates
Exhibit C—Experience Period
Because loss data for the 2017
policy period is not yet valued by
the insurance provider or reported
to NCCI, it is not used when the
2018 modification is being
calculated. The next renewal, on
January 1, 2019, will use the 2017
payroll and loss experience, while
dropping the oldest policy of the
three-year period mentioned
above.
This constant updating ensures a
stable historical record for the indi-
vidual employer, while also using
the most recent available reflection
of operating characteristics. In this
way, meaningful changes in safety
programs or improved technology
can be reflected in the costs paid
by an employer.
Once the employer meets the
qualifications for rating, the Plan
formula is applied and a credit or
debit modification is published by
the rating organization (NCCI).
The experience modification factor
would be applied by insurance
providers in states participating
in the interstate rating plan.
Generally, it applies for one year,
and a new modification is
calculated for the next year (as
long as eligibility requirements
are met).
A detailed explanation of the expe-
rience rating calculation is shown
later in this document.
Qualification for ExpereinceRatingAccording to the Plan, if an
employer meets the eligibility
requirements, then experience
rating is mandatory. The eligibility
requirements are established and
approved on a state-by-state basis.
To qualify, the employer must
achieve the established premium
threshold by one of two methods:
1. Have enough premium subject to
experience rating in the most
recent 24 months
OR
2. Achieve the established premium
threshold on average over the
entire experience period
Example
A state requires $10,000 in audited
premium subject to experience
rating in the most recent two years
of the experience period OR an
average of $5,000 in the overall
experience period. Exhibit D
illustrates how the qualification
requirement can be met for a 2018
experience rating.
If Employer 2 continues to have
declining premium amounts in sub-
sequent years, it may no longer
qualify to be experience rated. If
this were to occur, the insurance
provider would be notified by
NCCI that the employer no longer
qualifies to be experience rated.
Types of Experience RatingThere are two types of experience
modifications developed by NCCI:
intrastate and interstate. An
intrastate modification factor is
issued when the employer has
exposure in only one state that par-
ticipates in the Plan. An interstate
modification is issued when the
employer has exposure in two or
more states that participate in
the Plan.
Intrastate Modification
Take, for example, an employer
that has exposure in Florida only.
Florida participates in the Plan;
therefore, if the employer meets
the qualifications established,
NCCI will develop and publish an
intrastate modification for Florida.
Exhibit D—Qualification for Experience Rating
Page 6
Employer 1
2016—$6,500
2015—$5,500
2014—$2,000
Qualification requirement met in themost recent two years
Employer 2
2016—$4,100
2015—$5,200
2014—$6,000
Qualification requirement met whenpremium is averaged over three years
The premium qualification thresholds by state can be found in the Premium Eligibility table in the Plan.
If an employer has exposure in
Florida and Pennsylvania
(Pennsylvania does not participate
in the Plan) and meets the qualifi-
cations in both states, NCCI will
develop and publish an intrastate
modification that includes the pay-
roll and loss experience for Florida
only. The Pennsylvania bureau will
develop an intrastate modification
that includes the payroll and loss
experience for Pennsylvania only.
Interstate Modification
If an employer has exposure in
Florida and New York (both states
participate in the Plan), and meets
the qualifications established for at
least one of those states, NCCI will
develop and publish an interstate
modification for the employer. The
modification will include payroll
and loss experience from both
Florida and New York.
Status of Experience RatingThe status of an experience modifi-
cation is important because it is
used to determine what state-
approved rating values are being
used to calculate the experience
rating modification. There are
three statuses:
1. Preliminary
2. Final
3. Contingent
If the status is preliminary, it means
that NCCI does not have the final
approved rating values for the
state(s). A modification will be
calculated using the prior approved
rating values. Once the state’s final
approved rating values have been
received by NCCI, the modification
will then be revised to indicate a
status of final.
Note: NCCI cannot indicate that
an interstate modification is in a
final status until all of the states’
final approved values are used in
the calculation. Using the previous
interstate example, if Florida and
New York are both being calculat-
ed, and NCCI has Florida’s final
approved rating values but not
New York’s, the interstate modifi-
cation will have a status of prelimi-
nary until NCCI receives the New
York final approved rating values
for use. The worksheet will identify
which states are outstanding.
Lastly, another status used in
experience rating is contingent. A
contingent modification is issued
when NCCI is expecting audited
payroll and/or loss information but
has not received the information
from the insurance provider by the
time the rating is produced. Once
the audited payroll and/or loss
information is received by NCCI,
the modification will be revised to
add the newly received experience
data.
Experience RatingModification FactorThe modification factor applied to
an employer’s policy is either a
unity (1.00) factor, a credit modifi-
cation, or a debit modification.
An employer will receive a unity
factor against the premium if any
of the following apply:
• It does not meet eligibility
requirements for experience
rating
• It does not meet the minimum
data requirements
• It is a new business with no data
available for production of an
experience rating modification
• It qualifies for experience rating,
and the calculation results in a
1.00 modification
• Data could not be provided as a
result of an ownership change
A credit modification is a modifica-
tion lower than 1.00. If an employer
runs a safe workplace, which
includes implementing safety
programs, the employer will be in a
better position to receive a credit
experience rating modification
factor against its premium.
A debit modification is a modifica-
tion higher than 1.00. If an employer
receives a debit experience rating
modification factor against its pre-
mium, it may benefit from a review
of its workplace safety programs.
Page 7
Application of ExperienceRatingExhibit E illustrates the impact that
various experience modification
factors can have on the modified
premium. In these examples, the
premium prior to the application
of the modification factor is
$100,000.
Now let’s examine a more detailed
example that illustrates how both
the rates and the experience
modification factor impact the
premium determination process.
The information displayed in
Exhibit F is for a single roofing
company with employees in two
classifications. The rate, which is
approved by the state for each
classification, is applied per $100
of payroll. The roofing rate is high-
er than the clerical rate because it
has a greater potential for injuries.
Each $100 of payroll is multiplied
by the rate to arrive at the premi-
um for each classification. Summing
the premium for these two classifi-
cations yields the initial total
premium. The modification factor
is then applied to arrive at the
modified premium.
Data Used on the ExperienceRating WorksheetThe payroll and claim/loss
information used in experience
rating comes from unit statistical
reports. Insurance providers are
required to file a unit report with
NCCI for each policy they issue in
accordance with NCCI’s Statistical
Plan for Workers Compensation and
Employers Liability Insurance. Other
factors or rates on the worksheet
are actuarially derived and are
updated with each change in rates
approved on a state-by-state basis.
The first step in the experience
rating process is to transfer the
payroll and loss information from
the unit report to the experience
rating worksheet. Let’s take a look
at an NCCI experience rating work-
sheet for “Any Insured” in Exhibits
G and H. For a more in-depth
understanding of the worksheet,
view How to Understand Your
Experience Rating Worksheet—
Webinar on Demand on ncci.com.
Page 8
Exhibit F—Application of Experience Rating
Classification Payroll Divided by 100Rate per $100
Premiumof Payroll
Clerical $ 70,000 700 $ 0.75 $ 525
Roofer $200,000 2,000 $63.17 $126,340
Exhibit E—Application of Experience Rating
Premium Modification Factor Modified Premium
$100,000 x 0.75 = $ 75,000
$100,000 x 1.00 = $100,000
$100,000 x 1.25 = $125,000
Total Premium = $126,865
Modification Factor = 1.25
Modified Premium = $158,581
Page 9
Exhibit G—Page 2 of the Experience Rating Worksheet (DETAILED)
WORKERS COMPENSATION EXPERIENCE RATING
Risk Name: ANY INSURED
Rating Effective Date: 01/01/2018 Production Date: 09/01/2017 State: ANY STATE
Risk ID: 990123456
00-ANY STATE Firm ID: Firm Name: ANY INSURED
Carrier: 00000 Policy No: 2015UNIT Eff Date: 01/01/2015 Exp Date: 01/01/2016
Code
8380
8748
8810
ELR
1.24
.27
.06
D-Ratio
.33
.33
.38
Payroll
3,486,050
2,398,429
1,497,869
7,382,348
ExpectedLosses
43,227
6,476
899
Exp PrimLosses
14,265
2,137
342
230,125
Claim Data
1500001
1500002
IJ
05
06
OF
F
F
Act IncLosses
17,759
2,250
20,009
Act PrimLosses
16,500
2,250
Policy Total:SubjectPremium:
Total Act IncLosses:
1
2
3
4
5
6
719
8
10
911 15141312
16
17
18
Risk Information
The top section of Exhibit G
contains the basic identifying
information, such as the:
(1) Name of the employer
(2) State in which the employer is
located
(3) Risk Identification Number
(4) When the experience modifi-
cation was calculated
(5) The date the rating can be
applied to the policy
(6) Payroll (exposure)
(7) Classification code
(8) Expected Loss Rate (ELR)
(9) Expected Losses column
(10) Discount Ratio
(11) Expected Primary Losses
Expected Losses
The ELR (8) is the Expected Loss
Rate. It is the amount of expected
losses for the classification for each
$100 of payroll. Therefore, to
obtain the expected losses,
multiply the ELR by the payroll
divided by $100.
Taking the first line of the work-
sheet as an example, with an ELR of
1.24 and payroll of $3,486,050, the
calculation is 1.24 x ($3,486,050 ÷
100) = $43,227. The $43,227 is
entered in the Expected Losses
column (9).
The D-Ratio (10) is the Discount
Ratio. It represents the portion of
the expected losses that are
expected primary losses (11).
Multiply the expected losses by the
D-Ratio to get the expected pri-
mary losses. The calculation is
$43,227 x 0.33 = $14,265.
Claim Information
On the right-hand side is the
reported claim information for
each policy. Note that each loss is
not directly attributable to the pay-
roll information on the correspon-
ding line. The claim data column
(12) indicates claim numbers for
losses more than $2,000. Individual
claims of $2,000 or less may be
grouped together by injury type
(13). The number of claims grouped
will be indicated in the claim data
column (12) by “NO.” In addition,
there is an indicator that shows
whether the claim is open (O) or
final/closed (F) (14) and the actual
incurred losses amounts (15).
Note that in transferring the
losses from the unit report to the
experience rating worksheet, the
indemnity and medical amounts
are combined because we are only
concerned with the total amount
of the claim.
For example, claim number
1500001 (16) has an indemnity
cost of $11,200 and a medical cost
of $6,559 for a total of $17,759
(17). Medical-only claims (Injury
Type 6) are reduced by 70%. The
reduced losses are shown in the
summary only; the claim detail
shows the entire actual amounts
(18).
The second step is to separate the
actual losses into primary and
excess components. The actual
primary losses are shown in the last
column (19). For losses less than
$16,500, the whole amount is
taken as the primary value. For
losses greater than $16,500, only
the first $16,500 is primary.
Page 10
Exhibit H —Page 1 of the Experience Rating Worksheet (SUMMARY)
WORKERS COMPENSATION EXPERIENCE RATING
Risk Name: ANY INSURED
Rating Effective Date: 01/01/2018 Production Date: 09/01/2017 State: ANY STATE
Risk ID: 990123456
State
ANY
Wt
.14
Exp ExcessLosses
102,504
ExpectedLosses
153,186
Exp PrimLosses
50,682
Ballast
44,000
Act PrimLosses
70,115
(A)Wt
.14
(B) (C) Exp ExcessLosses (D - E)
102,504
(D) ExpectedLosses
153,186
(E) Exp PrimLosses
50,682
(G) Ballast
44,000
(H) Act IncLosses
73,129
(F) Act ExcLosses (H-I)
17,444
Act Exc Losses
17,444
(I) Act PrimLosses
55,685
Primary Losses
55,685
50,682
Actual
Expected
Factors
Stabilizing Value
132,153
132,153
Ratable Excess
2,442
14,351
Totals
190,280
197,186
Exp Mod
.96
ARAP FLARAP SARAP MAARAP
RATING REFLECTS A DECREASE OF 70% MEDICAL ONLY PRIMARY AND EXCESS LOSS
DOLLARS WHERE ERA IS APPLIED.
(I)
(E)
C * (1 – A) + G
C * (1 – A) + G
26 23 25 24 22 28 20 21
27
34
31
32
33
2930
(A) * (F)
(A) * (C)
Act Inc Losses
87,559
(J)
(K)
(J)/(K)
Page 11
Looking at the summary page
(Exhibit H), the loss amounts used
in the calculation are total losses of
$73,129 (20) and primary losses of
$55,685 (21). By subtracting the
primary from the total losses, we
obtain excess losses of $17,444
(22).
Now that primary and excess
losses have been determined,
the third step is to calculate the
expected losses for the employer.
The actual losses will be compared
with the expected losses to deter-
mine whether a credit (decrease)
or debit (increase) modification is
in order.
After totaling the expected losses,
the expected excess losses (23) are
obtained by subtracting the total
expected primary losses (24) from
the total expected losses (25). The
calculation is $153,186 – $50,682
= $102,504.
Experience Rating Modification
Factor
The final step is to calculate the
experience modification factor.
The term “ballast” is defined as
something that gives stability, such
as heavy material in the hold of a
ship to keep it from shifting too far
one way or the other. Similarly, the
ballast factor in the experience
rating formula helps prevent the
experience modification from
shifting too far above or below
unity. It is a stabilizing element
designed to limit the impact of any
single loss on the experience rating
modification. It is added to both the
actual primary losses and the
expected primary losses as part of
the Stabilizing Value. The ballast
value increases as expected losses
increase.
The “Wt” factor (26) is the weight
given to the excess losses and
expected losses. “Wt” is a small
percentage for small employers
and increases with the size of the
employer. The complement of “Wt”
or “1 – Wt” is assigned to the
expected excess losses to produce
another part of the Stabilizing
Value.
The Stabilizing Value (27) is calcu-
lated by multiplying the expected
excess losses (23) by (1 – Wt), then
adding the ballast value (28). The
calculation is $102,504 x (1 – 0.14)
+ 44,000 = $132,153. The weight-
ed ratable excess losses entering
the formula are obtained by multi-
plying the excess by the “Wt” value:
(29) Weighted Actual Excess =
$17,444 x 0.14 = $2,442
(30) Weighted Expected Excess =
$102,504 x 0.14 = $14,351
Adjusted actual losses (the
numerator of the fraction) used
in the calculation are obtained by
adding across and are equal in this
case to $190,280 (31). The
adjusted expected losses are
$197,186 (32).
The experience modification (33) is
derived by dividing adjusted actual
losses by the adjusted expected
losses, or $190,280 ÷ $197,186 =
.96. This .96 is applied to the
employer’s manual premium at
the policy’s renewal, effective
January 1, 2018.
Notification of experience rating
modification completion for each
employer is sent by NCCI to the
insurance provider on file and, in
some states, to the employer. The
experience rating modification and
worksheet are also made available
on Riskworkstation™.
Additional Factors
The last row of the summary page
(34) may include some or all of
the following additional factors:
Assigned Risk Adjustment Program
(ARAP), Florida Assigned Risk
Adjustment Program (FLARAP),
Simplified Assigned Risk
Adjustment Program (SARAP), and
Massachusetts All Risk Adjustment
Program (MAARAP). These factors
are calculated using the same data
used in the experience rating calcu-
lation and are filed and approved
programs. Most surcharge factors
are applied to assigned risk policies
and are only for those employers
with a debit modification.
Ownership Changes andCombination of EntitiesAnother component that may
affect the experience modification
© Copyright 1981–2017 National Council on Compensation Insurance, Inc. All Rights Reserved.Page 12
is a change in the ownership of
an individual employer. When a
change in ownership occurs, the
employer must notify the insurance
provider in writing within 90 days
of the date of the change. This can
be done by submitting a signed
ERM-14 Form—Confidential
Request for Ownership Information
or information in narrative form on
the employer’s letterhead signed
by an officer of the business. Upon
receipt of this information, the
insurance provider will forward it
to NCCI.
If a change in ownership occurs,
recalculation of experience modifi-
cations may be required. Changes
in ownership may affect the use of
an individual employer’s experi-
ence in past, current, and future
calculations of experience ratings.
NCCI may issue, retract, and/or
revise the current modification and
up to two preceding modifications
due to ownership or combination
changes. Generally, the past
experience of the business will be
transferred to the new owner.
These changes may also result in a
change in the rating effective date.
In addition, the experience of
businesses with more than 50%
common majority ownership is
combined into one experience
modification. Combinability of the
experience of entities with the
same ownership is based on the
premise that the owner is responsi-
ble for safety and loss prevention
programs within the businesses.
For additional information on the
impact of ownership changes to
the modification factor, please
refer to the Plan and the Basics of
Experience Rating Ownership—
Webinar on Demand.
Summary of the PlanThe essentials of experience rating
are that:
• It is mandatory for all employers
that meet a state’s premium
eligibility requirements
• The formula measures how the
performance of an employer
differs predictably from similarly
classified employers
• The formula is designed to tailor
the cost of coverage to an
individual employer
Two basic statistical principles
underlie the formula:
1. The larger the premium size, the
more reliable the actual record
is in predicting future losses.
Integral to the Plan is a credibili-
ty scale so that the actual
historical record is given more
weight/credibility as the size of
the employer increases. Even the
smallest employers have some
credibility, but for practical
purposes, it is necessary to
have a premium threshold, or a
minimum point, for eligibility.
2. The cost of an injury may
vary over a very large range.
Therefore, cost is less
predictable than the fact that an
injury occurred; to recognize and
account for this, primary and
excess loss components are used.
Additional Resources toReferenceTo complement this document,
there is a suite of experience rating
Webinars on Demand—located on
ncci.com—that cover some of the
topics reviewed in more detail. The
webinars, each of which can be
viewed in 30 minutes or less, are:
• Basics of Experience Rating
• Advanced Experience Rating
• How to Understand Your
Experience Rating Worksheet
• Basics of Experience Rating
Ownership
• How to Complete the ERM-14
Form
• Riskworkstation™ Overview
• Riskworkstation™ Test Mods
Overview
• Manuals Library
You can view additional webinars
on ncci.com.